The question facing investors as they enter the first week of February is what will it take to change the stubborn trends of global financial markets.
A glib answer appears to be: quite a lot.
One month into the New Year, investors are still struggling to crawl out of the über-bearish swamp of 2008.
Stocks fell in January. Relatively safe short-term government bonds and the dollar remained in favour. Gold continued a three-month upward climb. All very familiar.
And the headwinds that have held investors in this pattern for more than a year are gathering force.
Concerns about a declining global economy, for example, can now be compounded by fears that China will fare worse than previously expected. Hopes that the financial crisis is over, meanwhile, have been doused by new losses at several major banks.
Trade protectionism, deflation and even the collapse of the euro zone are now openly discussed in financial circles, even if they are more often dismissed than taken seriously.
“There is this dawning realization that the worst may not be behind us,” said Koray Yesildag, an economist at a GAM, an London-based asset management company in London.
But there are a few glimmers of light to cheer those hoping for a return to economic and financial stability.
For one thing, although world stocks as measured by the MSCI index fell in January on top of their 43.5 percent slide in 2008, they are still above the lows seen in November, which may yet prove to have been the bottom. They have essentially been trading in a range of roughly 7 percent either side of a midpoint that is about 18 percent above the trough of last year. Some suggestion of higher risk appetite can also be found by looking at flows of cash to emerging market equities and debt.
On the economic front, there have been little flickers of hope - like the less-than-feared contraction in the U.S. economy, an unexpected improvement in German business sentiment and a slight upturn in U.S. home sales.
But the overall climate is one of gloom, with investors expecting things to get better eventually, but not soon.
“For the coming weeks, we do not expect markets to improve much,” Klaus Wiener, head of research at Generali Investments, wrote in his February outlook. The “key reason is the globally synchronized recession and the impact it will have on company earnings.”
Earnings expectations have plummeted in a quite remarkable manner. Last July, analysts were looking at earnings growth of around 59 percent for companies in the S&P 500-stock index in the fourth quarter, according to Thomson Reuters data. Based on actual fourth-quarter statements and expectations for companies still to report, the final figure will be a decline of around 28 percent.
Quite a few investors also believe earnings expectations for this year and next remain too high. At the same time, there have been some positive surprises - American Express, Texas Instruments and Siemens, for example.
A clearer picture should come this week with the release of results from major U.S. companies running a gamut of industries. These include Motorola, Dow Chemical, Cisco, Kraft and Philip Morris.
In Europe, there is a similar range of big names, including Vodafone, but the focus may be more on the week afterward, when several large banks report.
Over the long term, it is the banking industry that will probably set the stage for a turnaround in current bearish investment patterns.
Yesildag, reflecting the views of many investors and analysts, said financial market players still needed to know how many more toxic assets were out there despite the huge write-downs already taken.
“You need to see some much clearer recognition of the problems,” he said. “The degree of uncertainty in markets has to be reduced.”
A new wrinkle for investors that might get some attention this week, meanwhile, is that on a couple of recent trading days, equities and bonds have been sold off together.
This is a break from the set patterns of the past few years, when any momentary rise in risk appetite for equities prompted selling of fixed-income assets and vice versa. Declines in tandem can be a signal of deepening risk aversion among investors.
But the currency trades did not match such a move, and Goldman Sachs analysts pointed out in a note that macroeconomic data were “not suggesting any acceleration in the pace of slowdown.”
Wayne Bowers, international chief executive of Northern Trusts Global Investments, said the joint sell-offs might simply reflect asset-allocation shifts by pension funds and the like as they begin to see their 2008 results.
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Few glimmers of hope as gloom gets deeper
By Jeremy Gaunt, Reuters
1 February2009
The question facing investors as they enter the first week of February is what will it take to change the stubborn trends of global financial markets.
A glib answer appears to be: quite a lot.
One month into the New Year, investors are still struggling to crawl out of the über-bearish swamp of 2008.
Stocks fell in January. Relatively safe short-term government bonds and the dollar remained in favour. Gold continued a three-month upward climb. All very familiar.
And the headwinds that have held investors in this pattern for more than a year are gathering force.
Concerns about a declining global economy, for example, can now be compounded by fears that China will fare worse than previously expected. Hopes that the financial crisis is over, meanwhile, have been doused by new losses at several major banks.
Trade protectionism, deflation and even the collapse of the euro zone are now openly discussed in financial circles, even if they are more often dismissed than taken seriously.
“There is this dawning realization that the worst may not be behind us,” said Koray Yesildag, an economist at a GAM, an London-based asset management company in London.
But there are a few glimmers of light to cheer those hoping for a return to economic and financial stability.
For one thing, although world stocks as measured by the MSCI index fell in January on top of their 43.5 percent slide in 2008, they are still above the lows seen in November, which may yet prove to have been the bottom. They have essentially been trading in a range of roughly 7 percent either side of a midpoint that is about 18 percent above the trough of last year. Some suggestion of higher risk appetite can also be found by looking at flows of cash to emerging market equities and debt.
On the economic front, there have been little flickers of hope - like the less-than-feared contraction in the U.S. economy, an unexpected improvement in German business sentiment and a slight upturn in U.S. home sales.
But the overall climate is one of gloom, with investors expecting things to get better eventually, but not soon.
“For the coming weeks, we do not expect markets to improve much,” Klaus Wiener, head of research at Generali Investments, wrote in his February outlook. The “key reason is the globally synchronized recession and the impact it will have on company earnings.”
Earnings expectations have plummeted in a quite remarkable manner. Last July, analysts were looking at earnings growth of around 59 percent for companies in the S&P 500-stock index in the fourth quarter, according to Thomson Reuters data. Based on actual fourth-quarter statements and expectations for companies still to report, the final figure will be a decline of around 28 percent.
Quite a few investors also believe earnings expectations for this year and next remain too high. At the same time, there have been some positive surprises - American Express, Texas Instruments and Siemens, for example.
A clearer picture should come this week with the release of results from major U.S. companies running a gamut of industries. These include Motorola, Dow Chemical, Cisco, Kraft and Philip Morris.
In Europe, there is a similar range of big names, including Vodafone, but the focus may be more on the week afterward, when several large banks report.
Over the long term, it is the banking industry that will probably set the stage for a turnaround in current bearish investment patterns.
Yesildag, reflecting the views of many investors and analysts, said financial market players still needed to know how many more toxic assets were out there despite the huge write-downs already taken.
“You need to see some much clearer recognition of the problems,” he said. “The degree of uncertainty in markets has to be reduced.”
A new wrinkle for investors that might get some attention this week, meanwhile, is that on a couple of recent trading days, equities and bonds have been sold off together.
This is a break from the set patterns of the past few years, when any momentary rise in risk appetite for equities prompted selling of fixed-income assets and vice versa. Declines in tandem can be a signal of deepening risk aversion among investors.
But the currency trades did not match such a move, and Goldman Sachs analysts pointed out in a note that macroeconomic data were “not suggesting any acceleration in the pace of slowdown.”
Wayne Bowers, international chief executive of Northern Trusts Global Investments, said the joint sell-offs might simply reflect asset-allocation shifts by pension funds and the like as they begin to see their 2008 results.
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